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It doesn’t take a financial genius to understand that securities trading in single-digit territory usually tend to be risky affairs. After all, if the underlying business commanded universal belief, it probably wouldn’t feature a cheap valuation. Nevertheless, among small-capitalization firms, few are as intriguingly tempting as Red Cat (RCAT).
A drone technology firm, Red Cat integrates robotic hardware and software for military, government and commercial operations. Through its subsidiaries Teal Drones and Flightwave Aerospace, the niche aerospace specialist offers a range of products. It’s perhaps best known for its small unmanned aerial systems with high-resolution thermal imaging.
Fundamentally, RCAT stock offers significant implications for global defense solutions. As the war in Ukraine has demonstrated, the nature of warfare has changed dramatically, with the most conspicuous evolution being the powerful role of unmanned drones. From their use as reconnaissance and intelligence platforms to weapons delivery systems, drones have reshaped our understanding of armed conflicts.
With more cynical opportunities available, Red Cat has stormed higher, especially throughout 2024. In the past 52 weeks, RCAT stock gained well over 1,000%. Indeed, one year ago, RCAT traded hands for less than a buck. Now, you almost need ten of them to buy one share.
Still, concerns have sprouted, leaving many investors anxious about next moves. In the business week ending Jan. 17, RCAT stock suffered a loss of just over 10%. And in the past few months, there have been a few weeks where losses averaged well over 10%.
So, should speculators buy the dip? Here’s what the stats have to say.
A Contrarian Approach Could Lead to Quick Profits in RCAT Stock
Not surprisingly given the attention that RCAT stock attracted, it took its place in Barchart’s unusual options volume screener. On Friday, total volume reached 36,532 contracts versus an open interest reading of 159,526 contracts. This metric represented an 18.1% lift over the trailing one-month average. Call volume slightly outpaced put volume, to the tune of 22,424 contracts to 14,108.
While the put/call volume ratio of 0.63 implied bullishness, options flow data — which focuses exclusively on big block transactions likely placed by institutional investors — revealed a more nuanced take. On the last day of the week, net trade sentiment landed at $126,200 below parity, thus favoring the bears. However, the split toward the pessimistic side of the spectrum was relatively modest.
Now, it must be said that RCAT may be charting a pattern somewhat similar to a bearish head and shoulders. Therefore, the longer-term picture is admittedly cloudy. However, from a near-term perspective, adventurous traders can potentially scalp a quick buck.
On any given week, there’s only a 45.56% chance that by the end of it, investors will be profitable in their position. And on a four-week basis, this statistic only improves slightly to 47.22%. In other words, RCAT stock carries a negative bias — worse than a coin toss.
However, these odds are calculated stochastically, divorced from any other context. In contrast, when you calculate the odds dynamically, a different statistical picture emerges. Whenever RCAT stock loses between 10% to 20% of value over a one-week period, by the end of the fourth subsequent week (roughly a month later), there’s a 57.58% chance that shares will rise.
What’s more, by the end of the second subsequent week, the odds of success are actually at their highest at 60.61%. Further, the median return clocks in at 12.9% (with an average return of 19.65%). That’s powerful intelligence that we can use to deploy a bullish options strategy.
A Quick Call Spread Beckons
Given that the odds statistically improve the highest during the second week following the defined extreme-fear event (i.e. a weekly loss of 10% to 20%), investors may want to consider deploying a bull call spread for the options chain expiring Jan. 31.
A bull call spread may be ideal rather than simply buying a straight call because of the discount effect. Essentially, the trader buys a call and simultaneously sells a call at a higher strike price (for the same expiration date). Because there is a credit received for the short call, this partially offsets the debit paid for the long call.
It also lowers the breakeven threshold since the short call reduces the “price gap” imposed by the net premium. Of course, the tradeoff is that the selling of the call caps the maximum reward potential. However, since we’re dealing with short-term time periods, this “penalty” isn’t contextually that severe.
From our statistical analysis, we know that the tendency is for RCAT stock to jump 12.9% from the anchor price (in this case, last Friday’s close). That puts RCAT at $9.66 by Jan. 31. Realistically, risk-tolerant speculators may consider the 7.50/9.50 bull call spread, which offers a 90.48% payout.
